Dear PoP – How Do I legally Rent Out the 3rd Floor of my House?

Photo by PoPville flickr user Takka-San

“Dear PoP,

I know you have posted questions about renting out a basement, which includes its own entrance and is a self-contained rental unit, as well as issues when someone rents out their entire house — but what do I, as the owner/resident of the property, need to do to legally rent out the third floor of my house. Anything? And how are the tax deductions affected? Do I still get them even though I live there? Can I deduct half the depreciation of my house because I am effectively renting half of it out? I realize you have posted questions like this before, but thought I would give it a shot as I imagine a lot of people have similar issues/questions, particularly considering that the summer intern season is upon us.”

Anyone rent out a room or a floor of their house?

25 Comment

  • If you manage it yourself, you can report the income and of course deduct the relevant and applicable expenses against the rental income only. You can likely figure out a way to apply depreciation expense to that portion of the house, but not the whole place, unless you report your use of the home as income too.

    • Self managed has nothing to do with the reporting of income. Personal use of your primary residence isn’t reported as income and you can’t depreciate a primary residence. Keep telling yourself you know what you’re talking about.

  • If it is a shared housing circumstance, then “legal” is significantly changed.

    Also, you can file a schedule E to claim your income and also write off expenses associated with the rental.

    A little internet research can tell you how to figure your depreciation, what fraction to use for expenses, what are expenses, etc.

    If you arent comfortable doing the research yourself and making these determinations consult a tax attorney.

  • Another question about this — aside from tax issues, what about DC requirements? Do you have to get a Basic Business License or register the room/floor with the Department of Housing and Community Development’s Rental Accommodation Division? Any need for an inspection? Thanks!

    • No. If you are sharing your space then none of that is required.

    • Yes, you’d need a rooming house business license.

      • Give me a break! Why?? It’s a roommate situation and the owner lives there!

      • This is not a rooming house. There are specific criteria for a rooming house – available at website. I rent out my 3rd floor and called about getting a bbl – but the people down there had no idea what I was talking about and finally said I didn’t need one for roommates in the house where I live. Unless they have a separate entrance, they are technically roommates.

  • One thing you should be aware of is that if you take depreciation on your tax return, you may have trouble refinancing your home as a primary residence. This happened to me recently. I still think its worth it in the long run, but its something to take into account in your calculations.

    • I apportion my home as a rental (because I rent a few rooms out). I recently refinanced and had no problems. Because I had signed leases for my tenants, they were able to count that as income.

      • I’ve heard differing tales about that — basically that you can’t use the income from a unit you reside in as qualifying income.

        • Like anonymous, I rent out rooms and had no trouble refinancing, but you have to be able to produce leases that match your rental income (which you need to count as income and pay taxes on).

  • I dont recommend schedule E. My recommendation is to set up a sole proprietorship, get a Tax ID number, and go the schedule C route. Its a MUCH more effective tax shelter.

    • This person is renting it out for a summer. I dont think we need to get overly complicated.

    • Your recommendation is completely wrong. Rental activities are reported on Schedule E, Schedule C is used for trade or business income, which rental income is not. Sch C is subject to Self-Employment tax, thereby making it a much less effective tax shelter.

  • Be sure you think thru the ramifications of having a bad legal tenant. Eviction is time consuming and sharing a space would be very uncomfortable. At a minimum if you do a lease, be sure it includes “waiver of notice to quit” which will shave 30 days off the legal kick-out process.

    Obviously, many people who are not concerned about the tax deduction rent out rooms in their houses or take on roommates with an informal (sometimes unwritten) lease and deposit. I rent a furnished room to friends of friends or (once) foreign student off craigslist. In my experience it is good to pick someone who does not have a lot of stuff and does not bring strangers home. Short term tenants (like people only here for the summer) are good because they have to leave in a few months and will pay a premium to rent temporarily. Overall I have had good experiences and the income helps.

  • Speaking of legal apartments, those with illegal English basement apartments would be wise to make things right with the District, because after years of looking the other way, they’re actively cracking down on these units.

    • well that will only raise rental prices to new highs. The District needs to revise the regulations to allow for different ceiling heights (basement), otherwise almost all of Capitol Hill is screwed.

  • Short-term tenants are great – I highly recommend renting out furnished rooms with utilities and internet included (keep it simple). I found I could get along with anyone for a few months and there are so many people looking for short-term housing that you’ll never have trouble finding renters. In the summer, I was bringing in more rent than my mortgage payment – great to help pay for home repairs and upgrades 🙂

    As for the OP’s questions – I used an accountant to do my taxes. Yes, you can take a lot of deductions and depreciation out for renting out even a portion of your home. I thought an accountant was worth every penny for figuring this out for me but also signing on the bottom line for the deductions I took. Also, I always reported all my rental income and had signed leases for every tenant.

    • Agreed summer interns are money! So are fall and winter ones. Since marrying I’m no longer renting out rooms but short term rentals in a home you live in is good. Because you live there and share common areas you can be picky about who stays there, which can help you avoid some problem issues if you check references. Always check references. Always! And have a lease or roommate agreement.
      Tax wise, ask your accountant. If you want to make it simple just straight up report the income and don’t take any deductions. You don’t have to take deductions. You can pay more tax if you don’t think you’re paying enough in taxes. That’s what I did for a few years, but then I wanted to keep more of my money and started looking for deductions.
      I asked DCRA about licenses. If you’re just renting rooms to one or two other persons in your own house, where you live, you don’t need a business license.

  • I don’t know what the DC requirements are, but I rent out a room in my 2 bedroom condo. I declare the income and with the help of my accountant, we calculate the percent of house rented, and deduct all of the expenses associated with the room directly and household expenses at that percentage. i.e. 15% of house is rented, 15% of monthly alarm is deducted as an expense.

    If you rent it fully furnished, don’t forget to save the receits on your furniture purchases.

  • off orig post but on topic: has anyone been or know anyone that’s been ‘busted’ for renting a basement apt with no certificate of occupancy? just curious how dc goes about ‘busting’ people – are there fines on top of supposedly having to pay the rent back? etc.? that said what if you rent your basement apartment in the same manner as you rent a room in your house? is it just a question of semantics?

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